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How to Tax Plan for the Second Round of Market Facilitation Payments

President Trump has given farmers an unexpected gift the last week of the calendar year: the second half of the Market Facilitation Payments (MFP), which are to help offset markets lost to the U.S.-China trade kerfuffle.

No one is turning these payments away. But for many farmers, they come at a time when their tax plans for 2018 are finished.

The first thing I do is look at the tax bracket our farm clients fall into, and see if there is any room to fill up that tax bracket. If our clients have already managed their tax plan at the high end of a particular tax bracket, then I suggest looking at some of the following options:

  1. Without spending any more money, do they have additional accelerated depreciation to take this year? This could be Bonus or Section 179 depreciation for machinery, equipment, or breeding livestock. Some producers may not have taken all the depreciation, choosing instead to save for future years. Given these last-minute MFP payments, now may be a good time to use that depreciation.
  2. Do you have crop insurance proceeds on a crop eligible to be deferred to 2019? If so – even though you’ve collected that cash for crop insurance – if your typical practice was to defer the majority of the crop sale until the next calendar year, the IRS allows you to defer that income and report it next year. This is another way to reduce your tax burden without spending money.

If those two aren’t available, you’d better look into prepaying feed, fertilizer, seed, fuel, and chemical purchases that you haven’t yet prepaid. You’ve probably done this already, but there may be a little more you can squeeze into the 2018 year. Often, those have discounts associated with them, so there is additional value on top of the tax benefits.

If you’ve already made all your prepays for the 2019 crop year, are you current on your operating loan or line-of-credit interest expense? Have you paid your second half of your farm real estate taxes? If you had decided to only pay half, now is a good time to pay that second half.

Finally, assuming you’ve exhausted all these options, dealerships for farm equipment, ATVs, and trucks are jumping at the chance to get you into a new or used piece of equipment. A caution: Be sure that this is a piece of equipment your operation needs, and not one that you merely want.

At the end of the day, if you can reduce your tax liability, go for it. However, we find that many lenders use tax returns as one means to gauge the health of your farm operation. Reporting more taxable income and paying a little more in taxes isn’t the end of the world and may give your lender peace of mind.

Julie Spiegel, CPA is an owner of Varney and Associates, CPA’s LLC of Manhattan, KS. She can be reached at jspiegel@varney.com.

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